A New Look Behind the Pricing of a $1,000 Pill

As much as half of biomedical R&D is actually paid for by the public. American taxpayers in particular are the greatest contributor to biomedical R&D, investing $30 billion annually in the National Institutes of Health.

When Gilead Sciences launched its new hepatitis C drug Sovaldi at $1,000 per pill in 2013, and then charged even more for the follow-up combination drug Harvoni, it sparked public outrage and forced unprecedented rationing of these life-saving medicines. The costs and widespread need overwhelmed patients, insurers, and government coffers. Why were these prices so high?

Last week, the U.S. Senate Finance Committee concluded an 18-month investigation that gave us the ugly answer. Lead Senators Ron Wyden and Chuck Grassley, Democrat and Republican respectively, found that Gilead “pursued a calculated scheme for pricing and marketing its hepatitis C drugs based on one goal: maximizing revenue, regardless of the human consequences.”

Gilead knew that its pricing would deny access to its cure to the vast majority of the three million Americans living with hepatitis C. And it didn’t care. “Let’s hold our position … no matter the headlines,” wrote Gilead’s executive vice president for commercial operations in an internal email disclosed by the Senate investigation.

The investigation also debunked one of the most common myths on which the pharmaceutical industry relies: that high prices are needed to spur innovation and recoup investment in research and development. It found that R&D costs did not factor into Gilead’s pricing at all—and neither did its $11 billion outlay to acquire Pharmasett, the company that developed the active ingredient behind the hepatitis C medicines. Rather, the company set the price based on what they thought they could get away with, balancing public outcry against profit maximization.

The public would be even more upset if it realized that drug companies were not even the primary investors in the risky R&D that drives innovation. (The companies spend far, far more on marketing). As much as half of biomedical R&D is actually paid for by the public. American taxpayers in particular are the greatest contributor to biomedical R&D, investing $30 billion annually in the National Institutes of Health (NIH). Much of the R&D behind Sovaldi was financed by the NIH and other public institutions.

What’s most troubling, however, is that a lack of any limits on pharmaceutical profit seeking means that the United States pays the highest prices for medicines of any country in the world. A course of Sovaldi, for example, priced at $84,000 in the United States, is available for less than $900 in India and Egypt, and between $46,000 and $53,000 in France, Germany, and the UK. Though U.S. taxpayers have already paid to develop these kinds of new drugs, companies like Gilead have patients pay again, at vast markups, in order to receive them.

To add insult to injury, drug companies routinely shirk their public responsibilities and avoid paying their fair share of taxes in the United States. The recent Pfizer–Allergan merger is a clear example. As for Gilead, after grossing over $12 billion in 2014—over 70 percent of that through sales in the United States—it is also dodging billions in U.S. taxes by filing its profits overseas.

As Senators Grassley and Wyden highlighted on Tuesday, their investigation of Sovaldi is emblematic of a much larger problem. In the build up to next year’s U.S. presidential election, voters may start to have their say. Candidates Hillary Clinton and Bernie Sanders have responded to a worried electorate by beginning to put forward proposals for reform. The public now has an opportunity to demand approaches that rein in the pharmaceutical industry’s monopoly over who gets what medicines and at what price.

“Let’s not fold to advocacy pressure in 2014,” a Gilead executive urged after Sovaldi’s release. Perhaps 2016 will force the company to a different resolution: one that better recognizes the needs of patients.

After all, when it comes to developing new medicines, the taxpayers have already paid.

Correction (December 8, 2015): The names of the political parties to which Senators Ron Wyden and Chuck Grassley respectively belong have been corrected.

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11 Comments

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Will

posted on Dec 8, 2015

Interesting article. Particularly troubling if companies are not taking R&D expenditure into account when determining pricing. That information would certainly go counter to the narrative that has existed for quite some time and indeed one generally accepted by both the public and many working on policies related to innovation.

Just one note: "Lead Senators Ron Wyden and Chuck Grassley, Republican and Democrat respectively..." This is backward regarding who is the Democrat and who is the Republican

Thanks for pointing out our error, Will. We've corrected this now, and we really appreciate your comments. When there's almost no transparency in either drug pricing, or in research and development, it's easy to see why the common assumption is wrong.

My partner has hepatitis C from prison medical following a drug conviction. Now he is on Medicaid and cannot get treatment as his liver is not scarred enough although his symptoms prevent him from working. We are now trying to get him treatment through importing the medicine from India. This is outrageous!

I have a different opinion from you guys. I had suffered from Hepatitis C until early part of this year. But Luckily, after 12 weeks of treatment by Kaiser, i was told that no more virus was detected at all. I know that I can not afford to get treatment of this virus without insurance. There will be a number of competing new drug will come up soon because of such a wonderful drug, which will stimulate more R&D efforts from Pharm industry if we leave it as it is. It will eventually drastically down the price. This implies that there will be more R&D effort to invent new drugs in the area of un-treatable areas of diseases such as Altzheimer and lung cancers. we will get benefit more from this than limiting the prices of drug. This will be getting more important as people will live longer. If you limit the profit by government, then no more research in the area of vaccine development at all.

Please consider such aspects, Please consider giving more tax or R&D benefits if limiting the price of the drug.

Did you read the article; We already paid for almost 1/2 of the R&D; Gillead is just out to make a profit on the back of taxpayers; and here is something they didnt mention in the article.. Dr. Raymond Schinazi Inventor of hepatitis C cure worked as a VA doctor when he invented the drug that now sells for $1,000 per pill. It only costs $16 to make.

I cannot get answers in my country, Argentina, about what was the deal when the Gov, along some labs started a Consortium, for the R&D of cancer drugs. It should be a Public Information!!, Your article can be used as a precedent for a future local investigation, i guess.
May I have your support to start it or some Guidance?

In UK the cash strapped NHS is always in the news. It would be interesting to look at the price they pay for drugs. The British National Formulary (BNF) shows prices paid by NHS. Even for drugs whose patent has clearly expired the India retail price is often very considerably less. Is it because Indian drugs are inferior or are there reasons that escape me?

All this talk about "transparency" is a myth. Some of us are open w/o are consent to the highest bidder, while others in this hierarchy are "invisible", it's all semantics, propaganda, and power over in the course of chaos. No-one seems to mention the fact that "generics in the U.S. can now be up to 40% less of the active ingredient, and ADHD medications are not only non standardized but some contain synthetic heavy metals. My BARR stimulant of 12 years shot up to 500 overnight, and that was 2 years ago. I have returned many as they are not authentic and vastly different. Because I wrote letters to Teva, [who bought-out Barr] and denied any alteration of the formula, now they brag online that they are too big to sue. I am being penalized because I spoke-out about the toxic side effects and lies in labeling with many adhd meds. Now I can't volunteer, take-on 2 job offers and am being denied a once cheap medication that changed my life. I'm disgusted that politicians can play doctor. This isn't a democracy, it's totalitarianism with a sadistic technological twist. Military industrial complex with too many ignorant people in positions they aren't qualified for; this is inhumane.

where to start? how about here: "...the company set the price based on what they thought they could get away with..."

while this is hopefully not news to you, all companies -- regardless of industry or geography -- set prices to maximise profits over the long term. the pharmaceutical industry is no exception in this regard.

"What’s most troubling, however, is that a lack of any limits on pharmaceutical profit seeking..."

as you've surely realized by now, pharmaceutical companies in the public sector are effectively required to maximise their profits for the benefit of investors, which --directly or indirectly -- include individuals like you and me.

i'm afraid your simplistic "us vs. them" arguments are unhelpful. if you posit that high drug prices are a problem, you must acknowledge that such prices are the byproduct of a system...and pharmaceutical companies are only one of multiple stakeholders in this system.